INTERNATIONAL BUSINESS

Chapter no. 1
FACTORS IN INTERNATIONAL BUSINESS
OPERATIONS
WHAT IS INTERNATIONAL BUSINESS?
• International business relates to any situation where the
production or distribution of goods or services crosses country
borders. Globalization—the shift toward a more interdependent
and integrated global economy—creates greater opportunities
for international business. Such globalization can take place in
terms of markets, where trade barriers are falling and buyer
preferences are changing. It can also be seen in terms of
production, where a company can source goods and services
easily from other countries.
WHAT IS INTERNATIONAL BUSINESS?
• The entities involved in international business range from large
multinational firms with thousands of employees doing business
in many countries around the world to a small one-person
company acting as an importer or exporter. This broader
definition of international business also encompasses for-profit
border-crossing transactions as well as transactions motivated
by nonfinancial gains (e.g., triple bottom line, corporate social
responsibility, and political favor) that affect a business’s future.
WHY STUDY GLOBALIZATION, INTERNATIONAL
BUSINESS AND THEIR RELATIONSHIP
• Globalization is the widening and deepening of independent
relationships among people from different nations. The term
sometimes refers to the elimination of barriers to international
movement of goods, services, capital, technology, and people that
influence the integration of world economies.
• Industries have expanded to distant places to gain supplies and
markets. As consumers we know from “Made in” labels that we
commonly buy products from all over the world.
WHY STUDY GLOBALIZATION, INTERNATIONAL
BUSINESS AND THEIR RELATIONSHIP
• Globalization enable us to get more variety, better quality, or
lower prices. Our meals contain spices that aren’t grown
domestically and fresh produce that may be out of season in the
local climate
• The global connections between supplies and markets results
from the activities of IB, which are all commercial transactions
(including sales, investments, and transportation) that take place
among countries.
WHY STUDY INTERNATIONAL BUSINESS?
• Studying IB is important because:
• Most companies are either international or compete with
international companies
• Modes of operations may differ from those used domestically
• It helps managers to decide where to find resources and to sell
• The best way of conducting business may differ by country
• An understanding helps you make better career decisions
• An understanding helps you decide what governmental policies to
support
THE FORCES DRIVING GLOBALIZATION AND IB
• Rise in And Application of Technology
• Hand held mobile communication devices
• Rising productivity-taking less time to produce the same thing
• Making of many new products cannot successfully take place in a
single country
• Much new technical innovation takes so many financial and
intellectual resources that companies from different countries
must cooperate to take on portions of development
ADVANCES IN COMMUNICATION AND
TRANSPORTATION
• New trends in communication and transportation allows us to
discover, desire and demand goods and services from abroad
• Innovations in transportation mean that more countries can
compete for sale to a given market. Flower producers from as far
away as Ecuador, Israel, the Netherlands, and New Zealand
compete with each other for the U.S. markets because growers
can ship flowers quickly and economically.
• Improved communication and transportation also enhance a
manager’s ability to oversee foreign operations
LIBERALIZATION OF CROSS BORDER TRADE AND
RESOURCE MOVEMENTS
• To protect its own industries, every country restricts the entry and
exit of only goods and services but also the resources
• Such restrictions, of course, set limits on IB activities and, because
regulations can change at any time, contribute to uncertainty
• Overtime, however, most governments have reduced such
restrictions primarily for three reasons:
• Their citizens want a great variety of goods and services at a lower
price
• Competition forces domestic producers to become more efficient
SERVICES THAT SUPPORT IB
• Companies and Governments have developed services that
facilitate global commerce.
• For e.g. letter of credit, other banking transactions like SWIFT
payments
• When Nike sells sportswear to a French soccer team, a bank in
France collects payments in Euros from the soccer team when
the shipment arrives at French customs and pays NIKE in US
dollars through a U.S.Bank
GROWTH IN CONSUMER PRESSURE
• Consumers are knowledgeable about products and services
available in other countries
• Consumer pressure has also spurred countries to spend more on
research and development and to search world wide for
innovations and products they can sell to ever-more demanding
consumers
• Consumers are more proficient today at sourcing the globe for
better deals, such as searching the internet for lower-priced
prescription drug abroad.
INCREASE IN GLOBAL COMPETITION
• Increased competitive pressures can persuade companies to buy
or sell abroad. For e.g. a company might introduce products into
markets where competitors are already gaining sales, or seek
supplies where competitors are getting cheaper or attractive
products
• Companies become global because of their founders’
international experience and because advances in
communications give them a good idea of the location for global
markets and supplies
CHANGES IN POLITICAL SITUATIONS AND
GOVERNMENT POLICIES
• For nearly half a century after World War II, business between communist
countries and the rest of the world was minimal.
• Political changes opens frontiers such as diplomatic relations between the
China and Pakistan.
• Governments still deny business with others for political reasons, such as
between Pakistan and India
• Government support programs, such as improving airport and seaport
facilities, to foster efficiencies for delivering goods internationally
• Governments also provide facilities and programs to support local business
men in doing business abroad. For e.g. Export Promotion Bureau, SMEDA
etc
EXPANSION OF CROSS NATIONAL COOPERATION
• The willingness to pursue such policies is due largely to these
three needs:
• 1. To gain reciprocal advantages
• 2. To attack problems jointly that one country acting alone
cannot solve
• 3. To deal with areas of concern that lie outside the territory of
any nation
EXPANSION OF CROSS NATIONAL COOPERATION
• Gain Reciprocal Advantages
• Essentially, companies don’t want to be disadvantaged when
operating internationally, so they lobby their governments to act
on their behalf.
• Multinational Problem Solving
• Governments often act to coordinate activities along their
mutual borders by building highways, railroads, and
hydroelectric dams that serve the interests of all partie
EXPANSION OF CROSS NATIONAL COOPERATION
• Areas Outside National Territories
• Three global areas belong to no single country: the noncoastal
areas of the oceans, outer space, and Antarctica
THE CRITICISM OF GLOBALIZATION
• Threats to National Sovereignty
• Countries seek to fulfill their citizens’ objectives by setting
policies reflecting national priorities, such as those governing
worker protection and environmental practices
• For example, if a country has stringent regulations on labor
conditions and requires clean production methods, it may not be
able to compete with countries that have less rigorous rules
THE CRITICISM OF GLOBALIZATION
• The Question of Small economies’ overdependence
• Critics complain that economically small countries depend too
much on larger ones for supplies and sales.
• They are vulnerable to foreign mandates, including everything
from defending certain UN positions to supporting a large
economy’s foreign military or economic actions.
• Similarly, critics complain that large international corporations are
powerful enough to dictate their operating terms (say, by
threatening to relocate), exploit legal loopholes to avoid political
oversight
THE CRITICISM OF GLOBALIZATION
• The Question of Cultural Homogeneity
• In essence, they argue that countries have difficulty maintaining the
traditional ways of life that unify and differentiate them.
• Fundamentally, they claim helplessness in stopping the incursion of
foreign influences by such means as satellite television, print media,
and Internet site
• Environmental Stress
• One argument is that growth in both production and international
travel consumes more nonrenewable natural resources and increases
environmental damage
THE CRITICISM OF GLOBALIZATION
• Environmental Stress
• Critics contend that buying from more distant locations increases
transportation, hence increasing the carbon footprint, which refers to
the total set of greenhouse gases emitted
• The positive effects of pursuing global interests may, nevertheless,
conflict with national interests.
• Consider the effect of global pressure on Brazil to help protect the
world’s climate by curtailing logging activity in the Amazon region.
• Unemployed Brazilian workers have felt that job creation in the logging
industry is more important than climate protection outside Brazil.
THE CRITICISM OF GLOBALIZATION
• Income Inequality
• Although globalization has brought unprecedented opportunities for firms to
profit by gaining more sales and cheaper or better supplies, critics argue that
profits have gone disproportionately to the top executives rather than to the
rank and file.
• As an example, manufacturing and foreign sales growth in China and India have
helped them to grow more rapidly than the United States, thus lessening the
relative economic leadership of the United States over those countries.
• Likewise, some workers have lost economic and social standing as
manufacturing jobs have shifted to other countries. The challenge, therefore, is
to maximize the gains from globalization while simultaneously minimizing the
costs borne by the losers
THE CRITICISM OF GLOBALIZATION
• Personal Stress
• Some repercussions of globalization can’t be measured in strictly
economic terms, such as people’s stress from real and potential
loss of relative economic and social positions.
WHY COMPANIES ENGAGE IN INTERNATIONAL
BUSINESS
• Sales Expansion
• Company’s sales depend on consumers’ demand. Obviously,
there are more potential consumers in the world than in any
single country
• Increased sales are a major motive for expanding into
international markets, and many of the world’s largest
companies derive more than half their sales outside their home
countries
WHY COMPANIES ENGAGE IN INTERNATIONAL
BUSINESS
• Resource Acquisition
• Producers and distributors seek out products, services,
resources, and components from foreign countries—sometimes
because domestic supplies are inadequate (such as industrial
diamonds in the United States)
• Sometimes firms gain competitive advantage by improving
product quality or differentiating their products from those of
competitors; in both cases, they’re potentially increasing market
share and profits
WHY COMPANIES ENGAGE IN INTERNATIONAL
BUSINESS
• Risk Reduction
• Selling in countries with different timing of business cycles can
decrease swings in sales and profits (e.g., increasing sales
stability through operations in countries that enter and recover
from recessions at even slightly different times)
• Finally, companies often go international for defensive reasons.
Perhaps they want to counter competitors’ advantages in foreign
markets that might hurt them elsewhere
INTERNATIONAL BUSINESS OPERATING MODES
• Merchandise exports and Imports
• Merchandise exports and imports are tangible products—goods
—that are respectively sent out of and brought into a country.
Because we can actually see these goods, they are sometimes
called visible exports and imports.
• Service Exports and Imports
• For non-merchandise international earnings, the terms are
service exports and imports and are referred to as invisibles.
• Tourism and transportation • Service performance • Asset use
TOURISM AND TRANSPORTATION
• Tourism and transportation are important sources of revenue for
airlines, shipping companies, travel agencies, and hotels. The
economies of some countries depend heavily on revenue from these
sectors, such as Greece and Norway
• Service Performance: Some services, including banking, insurance,
rental, engineering, and management services, net companies earnings
in the form of fees: payments for the performance of those services.
• On an international level, for example, companies receive fees for
engineering services rendered in turnkey operations, which are
construction projects performed under contract and transferred to
owners when they’re operationa
INTERNATIONAL BUSINESS OPERATING MODES
• Assets Use
• Companies receive royalties from licensing agreements, whereby
they allow others to use some assets—such as trademarks,
patents, copyrights, or expertise. For example, the Real Madrid
football team receives a royalty from Adidas’ use of its logo on
merchandise
INTERNATIONAL BUSINESS OPERATING MODES
• Investments
• Foreign Direct Investments
• In foreign direct investment (FDI), sometimes referred to simply as
direct investment, the investor takes a controlling interest in a foreign
company
• Portfolio Investment
• A portfolio investment is a non-controlling financial interest in
another entity. It consists of shares in or loans to a company (or
country) in the form of bonds, bills, or notes purchased by the
investor.
INTERNATIONAL BUSINESS OPERATING MODES
• Foreign portfolio investment (FPI) involves holding financial assets
from a country outside of the investor's own.
• FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds,
and exchange traded funds.
• Along with foreign direct investment (FDI), FPI is one of the
common ways for investors to participate in an overseas economy,
especially retail investors.
• Unlike FDI, FPI consists of passive ownership; investors have no
control over ventures or direct ownership of property or a stake in
a company.
TYPES OF INTERNATIONAL ORGANIZATIONS
• Multinational Enterprise
• A multinational enterprise (MNE) usually signifies any company
with foreign direct investments
• However, a small company can have foreign direct investments
and adopt any of the operating modes we’ve discussed. Note
though that, if successful, small companies become medium or
large ones
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• Physical Factors
• Geographic Influences
• Managers who are knowledgeable about geography are in a
position to better determine the location, quantity, quality, and
availability of the world’s natural resources and conditions
• Geographic barriers—mountains, deserts, jungles, and land-
locked areas—often affect communications and distribution
channel
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• And the chance of natural disasters and adverse climatic
conditions can make business riskier in some areas than in
others while affecting supplies, prices, and operating conditions
in far-off countries
• Demographics:
• Finally, countries’ populations differ in many ways, such as
density, education, age distribution, and life expectancy.
• These differences impact IB operations, such as market demand
and workforce availability
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• Institutional Factors
• Institutions refer to “systems of established and prevalent social rules that
structure social interactions. Language, money, law, systems of weights and
measures, table manners and firms (and other organizations) are thus all
institutions. Some institutions are:
• Political Policies:
• Obviously, political disputes—particularly military confrontations—can
disrupt trade and investment.
• Even conflicts that directly affect only small areas can have far-reaching effects
since these areas may produce important components needed for production
elsewhere and because tourists’ fear prevents their travel to the entire region.
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• Legal Policies:
• Domestic law includes both home- and host-country regulations
on such matters as taxation, employment, and foreign-exchange
transactions
• International law—in the form of legal agreements between
countries—determines how earnings are taxed by all
jurisdictions
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• Behavioral Factors
• The related disciplines of anthropology, psychology, and
sociology can help managers better understand different values,
attitudes, and beliefs to help them make operational decisions
abroad.
• A baseball game in the United States continues until there is a
winner, while Japanese games end with a tie if neither team is
ahead after 12 innings
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• Economic Forces
• Economics helps explain why countries exchange goods and
services, why capital and people travel among countries in the
course of business, and why one country’s currency has a certain
value compared to another’s
• Economics also helps explain why some countries can produce
goods or services for less
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• The Competitive Environment
• Competitive Product Strategy
• Products compete by means of cost or differentiation strategies,
the latter usually by
• Developing a favorable brand image, usually through advertising
or from long-term consumer experience with the brand; or
• Developing unique characteristics, such as through R&D efforts
or different means of distribution.
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• Different strategies can be used for different products or for
different countries, but a firm’s choice of strategy plays a big part
in determining how and where it will operate.
• Fiat Chrysler Automobiles (FCA) that competes with its best-
selling models by using a cost strategy aimed at mass-market
sales. This strategy has influenced FCA to shift some fabrication
of engine plants to China, where production costs are low, and to
sell in India and Argentina, which are cost-sensitive market
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• Competitive Strategy
• Company Resources and Experiences
• Competitive factors are a company’s size and resources
compared to those of its competitors. A market leader, for
example—say, CocaCola—has resources for much more
ambitious international operations than a smaller competitor
like Royal Crown.
COMPANIES EXTERNAL ENVIRONMENTS AFFECT
ON THEIR WORKING ABROAD
• Company Resources and Experiences
• In large markets companies have to invest much more to secure
national distribution than in small markets.
• Further, they’ll probably face more competitors in large markets
than in small ones
• Competitors faced in each market
• Finally, market success, whether domestic or foreign, often
depends on the strength of competition and whether it is
international or local market.